However, the price transparency required by current regulatory changes will now force external asset managers to prove how independent they really are. That will probably mean the end of trailer fees, to be replaced by “all-in” fee models, which are more transparent but less lucrative overall. As well as lower revenues, higher costs look inevitable, particularly because of tighter controls ensuring that clients’ investments are suitable for their risk profile.
In the circumstances, many believe that consolidation is inevitable. There are currently almost 2,500 EAMs in the industry in Switzerland, of whom around 80% manage less than CHF 250 million. However, building up scale may not be the only winning medium-term strategy for external asset managers, who could also find growth by using what has become a crucial advantage for them, i.e. their agility.
First of all, some external asset managers will be able to use that agility to gain a technological advantage. The simplicity of their IT architecture, which is entirely independent of banks’ increasingly complex platforms, gives them the opportunity of being at the leading edge of the digital revolution. Their ability to form partnerships with those offering the most innovative fintech solutions – in areas as varied as digital relationship onboarding, risk management, consolidated reporting and digital communication – could be a way of tackling shrinking margins.
Alliances of this kind would be beneficial in terms of both boosting revenues by attracting new types of clients, and cutting costs by improving operational processes. These technology-incubator external asset managers will select their custodian banks based on their ability to handle these new IT requirements, particularly in terms of transaction connectivity and data exchange capabilities in the broad sense. Banks would be well advised to start planning for this shift right now.
In a rapidly changing operating environment, EAMs, which generally have a simple governance structure, also have the advantage of being able to make radical, rapid changes to their strategy. In this respect, there are two underlying trends that both give the opportunity of exploring new business models, i.e. tax transparency and the digital revolution, including blockchain technology.
Wealth planning, and its tax aspects in particular, is now a central concern for clients, and therefore for external asset managers as well. The most opportunistic external asset managers will see a chance to expand their value proposition to include traditional family office services.
At the same time, some Swiss external asset managers are trying to harness the potential of the growing blockchain economy. They are being helped by Switzerland’s proactive support of this high-profile new business area. The most agile external asset managers, some of whom are actively taking part in the discussions being held by legislative and regulatory authorities, have been able to develop innovative services around cryptocurrencies or ICO (initial coin offerings) advisory work. By working with blockchain players at all stages of their projects, external asset managers are hoping to achieve obvious revenue synergies with their traditional wealth management business in the medium to long term.
As a result, consolidation and restructuring – and the pain that often accompanies them – are not the only options for external asset managers faced with changes in their ecosystem. Their business model and organisational efficiency gives them unrivalled agility, allowing them to seize the opportunities that those same changes are creating. By doing so, they can become catalysts for financial innovation, bringing with them banking partners that have the desire and flexibility needed to make adjustments and meet their requirements.
Head of EAM & Wealth Management Services